Per­sis­tently lower oil prices con­tinue to hurt UAE econ­omy: IMF

The Pak Banker - - COMPANIES/BOSS -

The Ex­ec­u­tive Board of the In­ter­na­tional Mon­e­tary Fund (IMF) to­day con­cluded the Ar­ti­cle IV con­sul­ta­tion with the United Arab Emi­rates.

Per­sis­tently lower oil prices con­tinue to weigh on eco­nomic sen­ti­ment and fis­cal and ex­ter­nal po­si­tions, but large buf­fers built over time have pro­vided am­ple pol­icy space, lim­ited neg­a­tive in­ward spillovers and con­tained the weak­en­ing of in­vestor ap­petite.

Non-oil eco­nomic ac­tiv­ity has slowed to 3.7 per­cent in 2015 driven by a con­trac­tion of pub­lic in­vest­ment in the con­text of fis­cal con­sol­i­da­tion, and lower con­tri­bu­tion from do­mes­tic pri­vate de­mand. Neg­a­tive ef­fects on over­all growth were par­tially off­set by the in­crease in oil pro­duc­tion. De­spite the strong fis­cal pol­icy re­sponse to ad­just to lower oil prices, the fis­cal bal­ance turned to a deficit of 2.1 per­cent of GDP, while the cur­rent ac­count sur­plus de­clined to 3.3 per­cent of GDP. Banks re­mained well cap­i­tal­ized and liq­uid, though pres­sures on prof­itabil­ity are emerg­ing as as­set qual­ity weak­ens due to the eco­nomic slow­down and ris- ing fund­ing costs.

Eco­nomic ac­tiv­ity is ex­pected to mod­er­ate fur­ther in 2016, be­fore im­prov­ing over the medium term. Non­hy­dro­car­bon growth is pro­jected to slow to 2.4 per­cent in 2016 due to fis­cal con­sol­i­da­tion, the stronger dol­lar, and tighter mon­e­tary and fi­nan­cial con­di­tions. Over the medium-term, non­hy­dro­car­bon growth is fore­cast to in­crease to above 4 per­cent as the damp­en­ing ef­fect of fis­cal con­sol­i­da­tion is off­set by im­prove­ments in eco­nomic sen­ti­ment and fi­nan­cial con­di­tions as oil prices rise, a pickup in pri­vate in­vest­ment in the run-up to the Expo 2020, and stronger ex­ter­nal de­mand.

Ex­ec­u­tive Direc­tors wel­comed the United Arab Emi­rates' re­silience to the oil price shock. Direc­tors com­mended the au­thor­i­ties for their pru­dent poli­cies, which helped build large fis­cal and ex­ter­nal buf­fers and strength­ened the econ­omy. Nev­er­the­less, per­sis­tent lower oil prices con­tinue to pose chal­lenges. Direc­tors un­der­scored the need for sus­tained sound macroe­co­nomic poli­cies to re­duce fis­cal vul­ner­a­bil­i­ties, safe­guard fi­nan­cial sta­bil­ity, and pro­mote long-term growth.

Direc­tors wel­comed the au­thor­i­ties' com­mit­ment to pur­sue fis­cal con­sol­i­da­tion. For the near term, in light of the am­ple buf­fers, they gen­er­ally con­sid­ered a grad­ual ad­just­ment ef­fort to be ap­pro­pri­ate in or­der to min­i­mize the neg­a­tive im­pact on growth. How­ever, stronger fis­cal con­sol­i­da­tion will be needed over the medium term to en­sure in­ter­gen­er­a­tional eq­uity.

Direc­tors en­cour­aged the au­thor­i­ties to di­ver­sify rev­enues and ra­tio­nal­ize cur­rent spend­ing, while fur­ther strength­en­ing pub­lic fi­nan­cial man­age­ment. They wel­comed the plans to in­tro­duce a VAT and in­crease ex­cise taxes, which could be fol­lowed by a cor­po­rate in­come tax. Direc­tors also rec­om­mended phas­ing out re­main­ing en­ergy sub­si­dies, while pro­tect­ing the vul­ner­a­ble. Pri­or­ity should also be given to curb other cur­rent spend­ing, while pre­serv­ing pub­lic in­vest­ment and en­hanc­ing its ef­fi­ciency. Direc­tors noted that de­vel­op­ing a con­sol­i­dated for­ward-look­ing medium-term fis­cal frame­work would as­sist the au­thor­i­ties in set­ting di­rec­tion for fis­cal pol­icy, and in align­ing re­source al­lo­ca­tion with the UAE 2021 vi­sion. They en­cour­aged the au­thor­i­ties to strengthen the debt man­age­ment frame­work to better ac­count for con­tin­gent li­a­bil­i­ties from Gov­ern­ment Re­lated En­ti­ties and Pub­lic-Pri­vate Part­ner­ships.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.